Tag: inflation

Monday Economic Report – October 20, 2014

Here is the summary for this week’s Monday Economic Report:

Global financial markets were highly volatile last week, with investors concerned about slower growth in Europe and an Ebola outbreak in the United States, among other factors. Indeed, industrial production in the Eurozone fell 1.8 percent in August, and activity was down largely across-the-board, most notably in Germany (down 4.3 percent), the Eurozone’s largest economy. Sluggish income and labor market growth in Europe has also pushed inflationary pressures lower, with year-over-year pricing changes of just 0.3 percent in September. Despite such worries, equity markets began to rebound on Friday, with the Dow Jones Industrial Average (DJIA) closing at 16380.41. Nonetheless, the DJIA remains 5.2 percent below its all-time high of 17279.74 on September 19.

Still, the U.S. economy has shown signs of resilience. Despite a softer August, manufacturing production increased 0.5 percent in September. Over the past 12 months, output in the sector has risen 3.7 percent. While this was slower than its July year-over-year pace, it reflects a nice improvement from the more sluggish 1.5 percent rate in January.

Moreover, surveys from the Manufacturers Alliance for Productivity and Innovation (MAPI) and the New York and Philadelphia Federal Reserve Banks observed expanding activity levels in their latest reports. Each measure eased somewhat in October, but they were expansionary nonetheless. The weakest of these reports was the Empire State Manufacturing Survey, which observed a slight contraction in new orders. Yet, even there, respondents remained mostly optimistic about demand and output over the next six months. Along those lines, MAPI has a generally upbeat outlook, predicting that manufacturing production will increase by 3.4 percent in 2014 and 4.0 percent in 2015.

Housing starts exceeded 1 million again, increasing from an annualized 957,000 units in August to 1,017,000 in September. This continues a slow-but-steady trend upward, with an average of 978,111 so far in 2014 relative to an average of 930,000 for all of 2013. Still, there was relatively weak housing activity throughout much of the second half of last year and the first half of this year, and the latest data suggest that the sector has begun to stabilize somewhat. I continue to predict housing starts solidly in the 1.1 million unit range by the beginning of 2015. Homebuilder confidence has also reflected a positive outlook despite slipping a bit in October. Lower mortgage rates might spur more residential construction activity. According to Freddie Mac, average 30-year fixed mortgage rates fell to 3.97 percent this past week, their lowest level since June 2013.

Meanwhile, there was mixed news on the consumer front. On the positive side, consumer confidence reached a pre-recessionary high, according to the University of Michigan and Thomson Reuters. This is a sign that improvements in the economy and lower gasoline prices have helped to lift Americans’ spirits. Yet, there are also lingering worries about income and labor market growth, and consumers remain somewhat cautious overall. Retail spending declined 0.3 percent in September, suggesting softness as we begin autumn. At the same time, year-over-year growth in retail sales was up 4.3 percent, a fairly decent rate, and the holiday season retail outlook looks pretty strong. We hope we will see better consumer spending data in the coming months.

This week, we will get additional insights regarding the health of the global economy. Markit will release Flash Purchasing Managers’ Index (PMI) data for China, Japan, the Eurozone and the United States. The European data are expected to show continued weakness, but we will be watching for signs of progress in the Chinese manufacturing sector, which has decelerated in recent months. The Kansas City Federal Reserve Bank will also unveil its latest manufacturing survey, and it is expected to show continued expansion in its district. Beyond these surveys, we will learn about growth in consumer prices, and if they are similar to the producer price index data released last week, they will reflect easing in both food and energy costs. Other highlights this week include reports on existing and new home sales, leading indicators and state employment.

Chad Moutray is the chief economist, National Association of Manufacturers. 

DJIA - oct2014

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Monday Economic Report – August 25, 2014

Here is the summary of this week’s Monday Economic Report:

Market leaders continue to play the guessing game of when the Federal Reserve Board will start to normalize short-term interest rates. Conventional wisdom suggests that the Federal Open Market Committee (FOMC) will begin to raise the federal funds rate sometime in 2015 from the near-zero levels that have been prevalent since the financial crisis in 2008. The Federal Reserve has already announced that it will cease purchasing long-term and mortgage-backed securities in October. In the July FOMC meeting minutes, participants noted recent improvements in the economy, including increased activity among manufacturers (see below). Most notably, they said the following regarding monetary policy over the next few months:

“…many participants noted that if convergence toward the Committee’s objectives occurred more quickly than expected, it might become appropriate to begin removing monetary policy accommodation sooner than they currently anticipated.”

That line, which was widely reported in the media, was seen as hawkish. Indeed, financial markets saw that statement as a sign that short-term rates might rise sooner than expected, perhaps as early as the first quarter of 2015. In her keynote speech at a Kansas City Federal Reserve economic symposium at Jackson Hole, Wyoming, Federal Reserve Chair Janet Yellen reiterated this point, noting the role that upcoming economic data will have on the timing of policy normalization. She cited continued “slack” in labor markets, but also highlighted positive developments more recently. Either way, it remains true that monetary policy will remain highly accommodative for the foreseeable future, with short-term rate hikes (whenever they occur) being gradual. Recent data on consumer and producer prices have shown inflationary pressures easing a bit, even as they remain near the Federal Reserve’s stated target of 2 percent.

Meanwhile, economic data released last week suggest that the manufacturing rebound that we have seen since the winter continues to strengthen. The Markit Flash U.S. Manufacturing Purchasing Managers’ Index (PMI) increased sharply, up from 55.8 in July to 58.0 in August, reaching its highest level since April 2010. The indices for new orders and production were both above 60, suggesting strong growth and closely mirroring similar data from the Institute for Supply Management (ISM). The Philadelphia Federal Reserve Bank’s manufacturing survey also reported healthy gains in August, with activity growing at its fastest pace in more than three years, and respondents were very upbeat in their assessment of the next six months. Still, if there are any weaknesses of note, it would be overseas. Manufacturing demand and output were softer in both China and Europe, for instance.

The housing market also appears to be faring better of late, recovering somewhat from the lull that we saw earlier in the year. Housing starts jumped 15.7 percent in July, offsetting significant declines in both May and June. Starts reached their second-highest pace since November 2007, with an annualized 1,093,000 units in July. Both single-family and multifamily construction activity were higher for the month, and housing permits also reflected progress. In addition, existing home sales also notched improved figures in July, with activity up for the fourth straight month. Overall, this is encouraging news for residential construction. We would expect a solid 1.1 million housing starts at the annual rate by year’s end, representing slow-but-steady progress.

This week, we will get an update on second-quarter real GDP, with consensus expectations calling for a slight downward revision from the 4.0 percent growth rate estimate announced in late July. The new figure would still represent a rebound from the first quarter’s decline of 2.1 percent. We will also see if regional activity continues to expand in the August manufacturing surveys from the Dallas, Richmond and Kansas City Federal Reserve Banks, mirroring what we have seen in the similar New York and Philadelphia Federal Reserve reports. Other highlights include the latest data on consumer confidence, durable goods orders and personal income and spending.

Chad Moutray is the chief economist, National Association of Manufacturers. 

markit us pmi - aug2014

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Europe’s Economy Slowed to a Halt in the Second Quarter

Eurostat reported flat real GDP growth in the second quarter for the Eurozone, the slowest pace since the first quarter of 2013. Since emerging from a deep recession in mid-2013, Europe has grown slowly, prompting deflationary worries and dampening what would otherwise have been a psychological boost. In the 18-member Eurozone, real GDP has expanded 0.7 percent over the past 12 months. Germany (down 0.2 percent) and Italy (down 0.2 percent) were among the countries in the second quarter with declining economic growth, with French growth unchanged for the second consecutive quarter. In contrast, the United Kingdom has been of the bright spots, with 0.8 percent growth in the second quarter and 3.1 percent growth year-over-year.

Given the sluggishness of recent income and economic activity growth in the Eurozone, we have also seen prices increase very slowly, up just 0.4 percent in July and down from 0.5 percent in June. This has prompted the European Central Bank to be more aggressive, and the latest data suggest even more monetary stimulus in the months ahead.

In the manufacturing sector, industrial production declined by 0.3 percent in the Eurozone in June. It has decreased in three of the past four months. On a year-over-year basis, industrial output was unchanged since June 2013 in the 18-member Eurozone. This represents a significant deceleration in the past two months, down from 1.8 percent in April. We will get our first look at August purchasing managers’ index (PMI) data on August 21, but this data suggest weaknesses for the month. The Markit Eurozone Manufacturing PMI report in July provided mixed news, with activity expanding for 13 straight months but with growth in activity continuing to ease over the course of this year.

Overall, these data show that Europe’s economic challenges are still not behind them, with activity slowing over much of this year. For manufacturers, this has meant cautious consumption and slowing production for both durable and nondurable goods. Energy production has declined by the largest amount year-over-year (down 3.4 percent), and tensions with Russia could present even-greater downside risks for the continent as temperatures start to fall in the fall and winter months.

Chad Moutray is the chief economist, National Association of Manufacturers. 

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Personal Spending Rebounded Slightly in May, Especially for Durable Goods

The Bureau of Economic Analysis said that personal spending increased 0.2 percent in May, an improvement from being essentially flat in April. In particular, durable goods purchases rose 0.7 percent, rebounding from a decline of 0.9 percent the month before. Nondurable goods and service-sector spending increased by 0.2 percent and 0.1 percent, respectively. Overall, the data suggest that consumer spending has largely recovered from winter-related softness in December and January, with personal spending up 1.4 percent since January. On a year-over-year basis, consumers have spent 3.7 percent.

Meanwhile, personal income rose for the fifth consecutive month, up 0.4 percent in May. Through the first five months of 2014, personal incomes have grown 2.0 percent, with year-over-year growth of 3.5 percent. For manufacturers, total wages and salaries increased from $760.8 billion in April to $765.8 billion in May. Manufacturing wages and salaries have moved up from averages of $735.4 billion and $747.4 billion in 2012 and 2013, respectively.

With personal income growth outpacing spending, the savings rate edged up from 4.5 percent to 4.8 percent. This was the highest level since September, and a definite improvement from March’s 4.2 percent pace.

The other closely-watched aspect of this report was the personal consumption expenditure (PCE) deflator, a widely used measure of pricing pressures in the economy. In fact, it is the measure that the Federal Reserve prefers to use when it assesses inflationary tendencies. As we have seen in other indicators, the PCE deflator reflects consumer prices that are rising, with the annual pace rising from 0.8 percent in February to 1.6 percent in April to 1.8 percent in May. Rising food and energy costs were the largest factors in this recent run-up, with monthly increases of 0.6 percent and 0.8 percent, respectively, in May.

Core inflation, which excludes food and energy costs, have grown 1.5 percent over the past 12 months, up from 1.1 percent in February. This suggests that pricing pressures remain below the Fed’s 2 percent target. Yet, it is something that the Fed and other analysts will continue to watch in the coming months.

Chad Moutray is the chief economist, National Association of Manufacturers. 

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Monday Economic Report – June 23, 2014

Here are the files for this week’s Monday Economic Report:

The Federal Reserve Bank downgraded its estimates of growth for 2014, with real GDP growth of 2.1 percent to 2.3 percent. This was down from its March projection of 2.8 percent to 3.0 percent, largely due to weaknesses in the first quarter. Nonetheless, the Federal Reserve still projects a pickup in activity during the second half of the year that will continue into 2015, with an unchanged outlook of 3.0 percent to 3.2 percent growth next year. The unemployment rate is anticipated to fall to 6.0 percent by year’s end and as low as 5.4 percent in 2015.

With that in mind, the Federal Open Market Committee (FOMC) observed that “growth in economic activity has rebounded in recent months,” even as it cited continued slack in the labor market. The FOMC continued to taper its asset purchases, down from $45 billion per month to $35 billion, and it mostly reiterated its intent to keep a highly accommodative monetary policy stance for the foreseeable future. Short-term interest rates are expected to start rising at some point next year. Yet, there is renewed chatter among “inflation hawks” about increased pricing pressures of late. Core consumer prices, which exclude food and energy costs, rose 1.95 percent over the past 12 months, its fastest year-over-year pace in 19 months. While inflation still appears to be in check, the recent run-up in costs has fueled a debate about whether short-term rates might need to increase sooner than conventional wisdom might suggest.

For manufacturers, activity continues to recover from winter-related softness at the beginning of the year. Manufacturing production has risen 2.8 percent since January’s decline, with 3.6 percent growth over the past 12 months. Capacity utilization for the sector increased to 77.0 percent in May, its highest level since March 2008. Similarly, manufacturers in the New York and Philadelphia Federal Reserve districts reported strong growth in their respective June surveys. More importantly, respondents were mostly optimistic about future activity. More than half of those taking each survey said they anticipate increased new orders over the next six months. The Philadelphia Federal Reserve report also noted that 73.9 percent of its manufacturers predicted increased production in the second half of this year, with nearly 48 percent forecasting output growth of more than 4 percent.

Meanwhile, the housing market has provided mixed progress so far this year, even as we remain cautiously optimistic about future months. New housing starts decreased from an annualized 1,071,000 units in May to 1,001,000 in June. Despite the decline, it was the second straight month that starts have exceeded 1 million units, and the underlying trend remains positive. April’s figure was an outlier, with the year-to-date average being 969,000. As such, we continue to make slow-but-steady progress. At the same time, housing permits also declined, but single-family permitting increased from 597,000 units at the annual rate to 619,000, the fastest pace since November. This could be a sign that residential construction will accelerate in the months ahead. I still believe we will reach 1.1 million housing starts by year’s end. Moreover, homebuilder confidence was also higher for the month.

This week, we will get additional data on the health of the housing and manufacturing sectors. The Kansas City and Richmond Federal Reserve Banks will unveil their latest surveys, and Markit will release Flash Purchasing Managers’ Index (PMI) data for China, Japan, the Eurozone and the United States. We hope they will continue to reflect rebounding activity in the United States, and analysts will be closely following the June Chinese PMI data to see if the sector expands for the first time in 2014. The other key number to watch will be the second revision of real GDP for the first quarter. The consensus estimate is for the decline in output to exceed 1.5 percent, worse than the 1.0 percent decrease in the first revision. Other highlights include new data on consumer confidence, durable goods orders and shipments, existing and new home sales and personal income and spending.

Chad Moutray is the chief economist, National Association of Manufacturers. 

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Monday Economic Report – June 2, 2014

Here is the summary for this week’s Monday Economic Report:

The U.S. economy contracted for the first time in three years in the first quarter of 2014. Real GDP fell 1.0 percent in the quarter, a fairly substantial revision from the earlier estimate of a gain of 0.1 percent. Much of the storyline behind these figures was the same, with consumer spending on services being the only real bright spot. Purchases of durable and nondurable goods were positive, but weather-related challenges dampened both. Weaknesses in business spending for equipment and structures, residential housing investments and reduced goods exports were all major drags on growth.

The bulk of the downward revision stemmed from lower inventory replenishment. Ironically, that could lead to more inventory spending in the second quarter with stocks running lower. In addition, other figures also point to a rebound in activity during the spring months, with my forecast for second-quarter real GDP at 3.8 percent. Still, U.S. and global growth have started off 2014 much slower than anticipated, particularly when averaging together the first and second quarters. For the year, we now expect growth of 2.3 percent, which would indicate a slight downgrade from the more optimistic outlook predicted coming out of the strong momentum during the second half of last year.

The spring rebound in the manufacturing sector can be seen in other data released last week as well, albeit with some mixed news overall. For instance, new durable goods orders rose 0.8 percent in April, building on strong growth in February and March. Nonetheless, excluding transportation, new durable goods orders were up less robustly, suggesting some broader weaknesses beyond the headline monthly figure. Moreover, new durable goods shipments declined 0.2 percent in April, even as the longer-term trend remains positive.

At the same time, regional Federal Reserve Bank surveys show a similar recovery for manufacturers, but also some easing in the latest data. Manufacturing activity in the Dallas Federal Reserve district has now expanded for 12 straight months, but the pace of growth for new orders, production, capacity and employment eased in May. The Richmond Federal Reserve’s report also observed a deceleration in sales growth; however, it also noted a pickup in shipments and hiring. Perceptions about the current business outlook were unchanged, even as conditions had improved from winter weather earlier in the year. Looking ahead six months, respondents in both Dallas and Richmond remain mostly upbeat, even if this enthusiasm was a bit weaker in May.

The two surveys also indicated a rise in pricing pressure expectations, consistent with other reports showing some higher raw material costs. Indeed, prices for personal consumption expenditures have risen 1.6 percent year-over-year, up from 0.9 percent in February and 1.1 percent in March. April’s increase stemmed largely from higher energy prices, with food costs also up modestly (but at a slower pace than the month before).

Speaking of consumer spending, Americans decreased their purchases by 0.1 percent in April following two months of healthy increases. Year-to-date, personal spending has grown 1.6 percent, with purchases up 4.3 percent over the past 12 months. Meanwhile, the two consumer confidence measures—one from the Conference Board and the other from the University of Michigan and Thomson Reuters—moved in opposite directions in May, even as they continue to reflect rising sentiment over the past few months, particularly since the government shutdown.

This week, the focus will be on jobs and trade. We will get new employment numbers for May on Friday, which we hope will build on April’s strong figures. Manufacturers have averaged just more than 13,000 workers per month since August, and the expectation is for job growth in the sector around 10,000 or so in May. The consensus forecast is for 215,000 additional nonfarm payroll workers for the month, suggesting decent hiring. On the international front, we will learn if manufactured goods exports can improve from the rather disappointing rates so far in 2014, up just 1.1 percent in the first quarter of this year relative to the same three months in 2013. Other highlights include new data on construction, factory orders, productivity and Purchasing Managers’ Index figures from the Institute for Supply Management.

Chad Moutray is the chief economist, National Association of Manufacturers. 

percent change in real GDP - jun2014

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Monday Report – May 5, 2014

Here is the summary of this week’s Monday Economic Report: 

With the U.S. economy growing just 0.1 percent in the first quarter of 2014, analysts need to ask themselves whether this was just an aberration—a function largely of winter-related slowness—or a sign of larger weaknesses. The preliminary real GDP data showed drags from business investment, net exports and the government. Consumer spending on services was the biggest positive, and durable and nondurable goods purchases were up marginally for the quarter. My view is that real GDP probably will be revised higher in future updates, particularly with other data showing rebounding activity in March.

Fortunately, other recent economic reports show the economy recovering from difficulties earlier in the year. Consumer spending picked up strongly in March, with pent-up demand for durable goods, such as automobiles, pushing up overall purchases. Along those lines, manufacturing construction spending and new factory orders were also higher in March, with the Dallas Federal Reserve Bank’s monthly survey mirroring other regional reports showing an increase in respondents’ outlook.

Nationally, manufacturing confidence appears to be rising, with the Institute for Supply Management’s (ISM) Purchasing Managers’ Index (PMI) rising from 53.7 in March to 54.9 in April, its highest point so far in 2014. Still, activity remains below the torrid pace at the end of last year. The ISM’s PMI values averaged 56.3 in the second half of 2013, with new orders and output averaging 61.8 and 62.6, respectively. As such, there is still room for improvement. One of the brighter spots in the ISM release was the increased pace of hiring, with the employment index jumping from 51.1 to 54.7. This suggested that more manufacturers were adding workers, which was progress from the slower rate the month before.

In fact, the sector has hired more than 13,000 additional employees on average each month since August, when manufacturing demand and output began gaining momentum last year. Since the end of 2009, manufacturers have created 623,000 new jobs, with 12.1 million workers total in April. In the larger economy, nonfarm payrolls increased by 288,000 for the month—well above the consensus estimate of around 220,000—and the unemployment rate fell sharply from 6.7 percent in March to 6.3 percent in April. Despite this progress, the unemployment rate’s decline was largely due to a significant drop in the labor force size. The participation rate returned to where it was in December, matching its lowest point since February 1978.

From its perspective, the Federal Reserve felt that the economy was getting better; yet, it continues to worry about elevated unemployment rates, reduced business investment and fiscal restraints. For that reason, the Federal Open Market Committee (FOMC) reported that it would keep its highly accommodative stance for the foreseeable future, with short-term rates effectively zero until likely sometime in 2015. Meanwhile, the Federal Reserve continued to taper its long-term and mortgage-backed securities purchases from $55 billion per month to $45 billion, as expected. On the positive side, inflationary pressures remain minimal, with the personal consumption expenditure deflator up just 1.1 percent year-over-year and below the FOMC’s stated target of 2 percent.

This week, the highlight will come tomorrow with the release of new international trade numbers. In the first two months of 2014, manufactured goods exports were below their pace of 2013. It will be important to see if the picture improves in the March data. Beyond trade, other highlights to watch include the latest reports on consumer credit, job openings, productivity and wholesale trade.

Chad Moutray is the chief economist, National Association of Manufacturers. 

monthly employment changes - may2014

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No Surprises in the FOMC Statement

The Federal Reserve said that it would keep its “highly accommodative stance” according to its latest monetary policy statement, which mostly adhered to expectations. The Federal Open Market Committee (FOMC) continued to taper its long-term and mortgage-backed securities purchases from $55 billion per month to $45 billion, as anticipated. The winding down of the Fed’s quantitative easing measures have mostly been on auto-pilot since tapering began in December.

At the same time, the FOMC statement’s forward guidance continued to be more qualitative than quantitative, something that started at its March meeting. As such, the Fed no longer refers to an unemployment rate of 6.5 percent as a threshold for its short-term interest rate policy. The Fed will continue to pursue stimulative measures in the economy – with short-term rates near zero – until it sees sufficient economic progress. Such goals are consistent with the Fed’s “objectives of maximum employment and 2 percent inflation.” The statement says that it will keep rates low “for a considerable time after the asset purchase program ends,” particularly if long-term inflation stays below its two percent goal.

Regarding economic growth, the Fed notes recent progress from the winter-related slowdowns earlier in the year. While the FOMC participants see some improvement in the labor market, the unemployment rate “remains elevated” and a major concern. Reduced business investment and fiscal restraint were also challenges. On the positive side, pricing pressures remain minimal.

None of the FOMC participants dissented this time around. In March, Narayana Kocherlakota, the president of the Federal Reserve Bank of Minneapolis, did not support dropping the unemployment rate target from the Fed’s forward guidance. This was only the second time – the other time was in January – since June 2011 that there were no dissents in the FOMC statement.

Chad Moutray is the chief economist, National Association of Manufacturers.

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Manufacturers Cite a Rebound in Activity in Richmond Fed District

The Richmond Federal Reserve Bank said that manufacturing activity in its District rebounded in April after contracting in both February and March. The composite index increased from -7 in March to 7 in April as manufacturers have begun to recover from weather-related weaknesses. The pace of new orders (up from -9 to 10) and shipments (up from -9 to 6) both picked up for the month, helping to lead the overall index higher. Capacity utilization returned to growth, but just barely (up from -14 to 1), suggesting some stabilization.

With that said, the index for the average workweek was unchanged (2), and employment growth remained weak, but fortunately positive (up from zero to 4).

Looking forward six months, manufacturers in the region remained mostly upbeat about the future, but that sentiment eased somewhat in April. For instance, the index for expected new orders dropped from 30 to 21. Still, this suggests relatively strong growth in sales over the coming months, with similar optimism for shipments, utilization, hiring, and capital spending. In all, it indicates that manufacturing leaders in the Richmond Fed District are hopeful in their overall outlook despite the slippage in the forward-looking measures in this survey.

Meanwhile, pricing pressures are anticipated to be quite minimal. The prices paid for raw materials edged down from 0.85 percent at the annual rate in March to 0.78 percent in April. Likewise, final goods prices rose just 0.30 percent, down from the 0.32 growth rate the month before. Pricing pressures six months from now also eased, down from 1.81 percent to 1.32 percent.

Chad Moutray is the chief economist, National Association of Manufacturers.

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Monday Economic Report – April 21, 2014

Here is the summary for this week’s Monday Economic Report:

The Federal Reserve Board’s April Beige Book brought new evidence that the moderate economic recovery is getting back on track as the impact of the harsh winter weather abates. Manufacturing improved in most of the Federal Reserve’s 12 districts, growing at a “steady pace” in New York, Atlanta, St. Louis and Dallas, and gaining “some momentum” in San Francisco. The transportation sector strengthened, with the outlook described as optimistic. Reports on both residential and commercial construction showed that the sector continues to improve, albeit slowly; this was consistent with the moderate pickup in housing starts, from 920,000 in February to 946,000 in March. Consumer spending increased in most districts, confirming that the resilience of the household sector remains a key driver of the recovery. The Beige Book also indicated that price and wage pressures remain limited. This supports the majority view of the Federal Open Market Committee that there is still sufficient slack in the labor market to warrant an accommodative monetary policy for some time.

The Philadelphia Federal Reserve’s Business Outlook Survey painted a similar picture, confirming a pickup in manufacturing activity following weather-related weakness the previous month, and with respondents optimistic that growth would continue over the coming months. Demand for manufactured goods rose, with the new orders index at +5.7 compared to February’s -5.2; shipments also increased. Employment levels were steady, but the survey recorded a more optimistic outlook here as well, with the percentage of firms expecting higher employment rising to 34 percent compared to February’s 27 percent. Just under half of firms polled expected higher capital spending this year compared to 2013, with one-fifth expecting a lower level. Firms not planning to increase capital spending cited low growth, low capacity utilization and limited need to replace capital and technology equipment. Overall, the Philadelphia Federal Reserve survey and the Beige Book confirm that the recovery is gaining more traction, but also suggest it will take longer for the pace of activity to accelerate in a more decisive manner.

Federal Reserve Chair Janet Yellen underscored the benign inflation scenario in a speech at the Economic Club of New York—her second public speech since assuming the Federal Reserve’s leadership. Asked whether the Federal Reserve would be prepared to let inflation drift above 2 percent in order to provide additional support to the recovery, Yellen noted that the risks are still skewed toward inflation being too low, not too high, and the Federal Reserve’s challenge for the time being is to bring inflation up and closer to the 2 percent target. She also pointed out that this low inflation environment currently characterizes not just the United States, but other main advanced economies, notably Japan and Europe, where the European Central Bank is debating possible additional monetary stimulus. Yellen stressed, however, that the Federal Reserve is well aware that overshooting the inflation objective “can be very costly,” and will, therefore, tighten policy in a timely manner at a pace dictated by the improvement in activity and employment. Unwinding monetary stimulus at the right pace is essential to the recovery’s sustainability, and the Federal Reserve will keep striving to guide market expectations to minimize the risks of sudden adjustments in market interest rates during the transition.

Inflation, meanwhile, edged up in March, with the headline Consumer Price Index (CPI) rising to 1.5 percent year-over-year compared to 1.1 percent in February, driven by increases in the prices of food, natural gas and electricity, partially compensated by a drop in gasoline prices. Core CPI inflation, calculated by stripping out the more volatile energy and food components, rose to 1.7 percent year-over-year from February’s 1.6 percent. The Federal Reserve’s preferred measure of inflation, however—the change in the Personal Consumption Expenditure Deflator Index—is significantly lower and stood at 0.9 percent in February (the March figure has not yet been released).

This week will allow us to take the pulse of global manufacturing, with the Markit Flash Manufacturing PMIs for the United States, China and the Eurozone. The reading for China will be followed especially closely, given that an intensification of China’s slowdown might have repercussions on global demand for commodities. The durable goods report will offer another important gauge of the pace of the recovery and the health of demand for manufacturing in the United States. Other highlights include new home sales and the University of Michigan Consumer Sentiment Index.

Many thanks to General Electric Chief Economist Marco Annunziata for compiling this week’s Monday Economic Report.

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